payment systems

Efficient, accessible and safe retail payment systems and services are necessary to extend access to transaction accounts to the 2 billion people worldwide who are still unserved by regulated financial service providers.

Establishing payments interoperability is a formidable task. Our experience shows it is important to find the right balance between cooperation and competition when reforming retail payment systems. Despite the advantages that interoperability brings, not all market participants will necessarily embrace interoperability initiatives, e.g. if they fear to lose their dominant position and/or competitive advantage. In an earlier Blog the role authorities to facilitate interoperability has been discussed. Central banks are a key driving force in any payment system reform, but they cannot – and should not – act alone. Other regulators – such as financial and telecom regulators – are also important to achieving interoperability.

Interoperability – a term used in a variety of industries, including telecommunications and financial services – is generally understood to refer to the ability of different systems and sometimes even different products to seamlessly interact. For payment systems, “interoperability” depends not only on the technical ability of two platforms to interact but also the contractual relationships between the entities wanting to interact. Traditionally, interoperability has been established by the same type of institutions, by banks’ participation in a central retail payment infrastructure (e.g. a central switch or an automated clearing house) and adhering to a payment scheme (e.g. a card scheme or a credit transfer scheme).

These days interoperability in retail payments is no longer limited by national borders and the overall ecosystem has become more complex. Non-bank payment service providers have emerged (many of them mobile network operators-MNOs) and there are new types of payment instruments (e.g. mobile money). Innovative payment instruments often start as proprietary solutions, processed in-house rather than via a central platform. In that regard, interoperability can help tear down barriers by enabling transactions between customer accounts of different mobile money solutions. In some countries, interoperability even facilitates transactions across different type of accounts (e.g. deposit transaction accounts held with banks and mobile money accounts held with non-bank service providers).

Getting payment products to “understand” each other, or to be “interoperable,” is a big challenge to solve if we want to expand overall digital services and financially include the 2 billion people worldwide who are currently excluded from the formal financial system.

Making it easy for people to access transaction accounts and payment services matters.

We see interoperability as a means for people worldwide to make electronic payments in a convenient, affordable, fast, seamless and secure way through a transaction account.

When payment systems are interoperable, they allow two or more proprietary platforms or even different products to interact seamlessly. Interoperability can promote competition, reduce fixed costs and enable economies of scale that help ensure the financial viability of the service and make payment services more convenient.

Retail payment systems are important to the smooth functioning of an economy. Inefficiencies in the retail payments market can have significant negative effects throughout the economy. Retail payments are defined as regular payments of relatively low value that are not time critical and where the payer and/or the payee is not a financial institution.

Cost efficiency has been at the forefront of arguments for moving from paper-based to electronic payment instruments. Studies have shown that significant savings can be achieved in the transition from cash and paper-based to electronic payment instruments.

However, inefficiencies persist, with cash still being “king” in many countries. Among the non-cash payment instruments, the check is still dominant in lower-middle-income and low-income countries and check processing can be cumbersome and costly.

While some 700 million people have gained access to a transaction account between 2011 and 2014, there are still about 2 billion adults in the world who lack access to transaction accounts offered by regulated and/or authorized financial service providers. The increased role that non-banks play in financial services, particularly in the payments area, has contributed to making them available and useful to many people who were previously locked out of the financial system.

There is broad recognition that financial inclusion can help people get out of poverty as it can help them better manage their finances. Access to a transaction account is the first step in that direction. A transaction account allows people to take advantage of different (electronic) ways to send or receive payments, and it can serve as a gateway to other financial products, such as credit, saving and insurance.

Payment services are usually the first and typically most often used financial service. Understanding how payment aspects can affect financial inclusion efforts is important not only for the Committee of Payments and Market Infrastructures (CPMI) of the Bank for International Settlements and the World Bank Group, but for all stakeholders with interest in increasing financial access and broader financial inclusion.

An increasing number of anecdotal reports about banks’ de-risking remittances service providers and the negative impact these actions have had on the industry have been circulating within the international financial community over the last few years.

Different sources have for instance reported that banks are supposedly cutting off access to banking services to money transfer operators (MTOs) because generated revenue isn’t sufficient to offset the cost of complying with AML/CFT and other requirements.

MTOs are crucial to the international remittances industry and provide relevant services for many migrants and their families. They also help extend reach and access to remittances and other financial services since they operate in many remote locations where banks aren’t present.

The price of sending international remittances has reached a new record low in the first quarter of 2014. The global average cost of sending money across borders was recorded at 8.36 percent. This figure is used as a reference point for measuring progress toward achieving the so-called “5x5” objective – a goal endorsed by the G8 and G20 countries – to reduce the cost of sending remittances by five percentage points, to 5 percent, by the end of 2014.

Most indexes of international remittance costs – published by the World Bank in the new, ninth issue of the Remittance Prices Worldwide report, which was released on March 31 – indicate good progress in the market for remittances.

The global average cost is significantly lower when weighted by the volume of money that flows in each of the report’s country-to-country pairs. The weighted average cost is now down to 5.91 percent, following a further decline in the last quarter. For the first time, the weighted average has fallen below 6 percent.

Nearly one-third of the remittance-sending countries included in Remittance Prices Worldwide have now achieved a reduction of at least 3 percentage points. Those countries include such major sources of remittances as Australia, Canada, Germany, Italy and Japan. This is also the case for 39 out of 89 of the remittance-receiving countries.

A team from the World Bank's service line on Financial Infrastructure, hosting the launch event, was thrilled to welcome a room full of migrants, market paricipants, public officials, policy researchers and private-sector observers.

Since March 2013, in partnershp with the Turin city government, the World Bank team has been preparing for the launch of Project Greenback 2.0, which aims to foster the development of a sound and efficient market for remittances. The project pursues an important new approach: It focuses on remittance senders, and its priority is meeting their needs.

In the first months of our efforts in Turin, we have been working on a survey among remittance senders, and we have been mapping and monitoring the services that are available to them when they seek to send money home. The survey focused on Romanians, Moroccans and Peruvians – the most numerous immigrant groups in Turin, who together account for more than 60 percent of the city's immigrant population.

Governments and private sector actions can drive down remittance prices for migrants (Credit: DFID-UK, Flickr Creative Commons)
An estimated 215 million people – 3 percent of the world’s population – have emigrated far from home in order to earn enough to support their families. They include workers from Bangladesh who go to Saudi Arabia to work in the construction trade, Afghans who go to Iran to work in the oilfields, and workers from Burkina Faso who go to Cote d’Ivoire to work on the cocoa or coffee harvests.

Toiling far from their loved ones is not their only burden. When migrants send their money home, they are often charged exorbitant fees, which can account for a large portion of the small sums being sent - sometimes upwards of 20 percent – and can inflict a punishing burden on poor migrants.

Migrant workers, earning money in jobs far from home, sent more than $400 billion to their families back home in 2012. Such remittances remain a vital source of income for millions of people in developing countries: Food, housing, education, health care and more are paid for every day by workers who earn money abroad. Through a simple and repetitive transaction – sending money home – those workers are really sending heart-warming feelings like hope for a better future and love of family.